Your Finances: Recapping plans for retirement

Let's talk about five steps to a confident, contented retirement. Over the past several weeks, we have been discussing retirement planning. Today, I am going to recap briefly.

Laura Medigovich

Let's talk about five steps to a confident, contented retirement. Over the past several weeks, we have been discussing retirement planning. Today, I am going to recap briefly.

If you plan on retiring in the next two to five years, here are some steps to ensure your success.

1. Ascertain desired retirement income: Start with your fixed expenses, such as housing, property taxes, utilities, loan payments, food and clothing. Next, add in expenses that may be created as a result of your retirement, such as health insurance. Then, add in the cost of your hobbies, travel and other recreational expenses. As you tally your numbers, make sure to add in a few hundred dollars a month as a buffer for unexpected expenses. Also, include a cost of living increase to account for inflation.

2. Determine replacement income: Traditionally, the sources of replacement income are often referred to as the three-legged stool. The first leg is Social Security benefits, the second is pension plan benefits and the third is personal savings. Add the amount of your monthly Social Security and your pension benefit together.

Next, subtract your monthly income needs (the number you figured in step one). The difference is the amount of money you will need to withdraw from personal savings each month. For example, your Social Security benefit is $1,700 and your pension payment is $2,300, so $1,700 plus $2,300 equals $4,000. Your desired retirement income is $5,000 a month. You will need to withdraw $1,000 from your personal savings each month to obtain your desired retirement income.

3. Pay down debt: For the majority of people, retirement means a reduced income, so reducing cash outflow is a priority. Focus on paying off your mortgage and all other debts before you retire. You can make lump sum payments to principal when you get yearly bonuses, add extra money to your monthly mortgage payment to pay down principal or make a couple of extra mortgage payments a year if your income allows.

4. Test out retirement spending: This can provide you with a window into the future, so you can make informed retirement decisions. Live for a year on the desired retirement income you outlined in step one. This exercise serves two purposes. First, you can ascertain whether you can live on your budgeted retirement income. How are your spending habits affected by this budgetary restraint? Second, the extra money you are not spending can be allocated toward additional retirement savings, or paying off your debt, which will enhance your retirement plan.

5. Recalibrate as needed: By going through these steps before you actually retire, you can make necessary adjustments. Perhaps you will decide to work a couple of extra years to pad your retirement. Or you may decide to work part time for a few years to supplement your income, as you ease into retirement. Perhaps you will realize that retirement is within reach and all your saving has paid off.

Retirement planning can be rather complex, with many moving parts. You may want to work with your investment adviser as you go through these planning steps.

For more information on these steps, you can review my previous columns on retirement at www.recordonline.com.